The Federal Court of Appeal’s recent decision in The Queen v. Guindon attempts to answer the question: when is an intentional action criminal in nature? In Guindon, the taxpayer signed 153 charitable donation receipts in what was characterized by the Court as a sham transaction. She was penalized a total of $564,747 under the tax return preparer penalty in subsection 163.2(4) of the Income Tax Act. The taxpayer argued that the penalty was so severe as to constitute an offence. The taxpayer had succeeded in the Tax Court of Canada, but the Federal Court of Appeal said that the Canada Revenue Agency properly applied the penalty.

Nearly all offences in Canada are specifically defined by legislation. However, there is a grey area in Canadian law as to what constitutes a crime. When actions are subjected to punishment that is so severe as to constitute “true penal consequences”, then they can be termed a crime (or offence). Offences must be prosecuted in a provincial superior court, and they attract the protection of section 11 of the Canadian Charter of Rights and Freedoms: the right to not be compelled as a witness; the right to trial within a reasonable time; the right to be presumed innocent until proven guilty, with the burden of proof being beyond a reasonable doubt, not just a civil balance of probabilities.

The Canadian Income Tax Act specifically criminalizes certain conduct, tax evasion being the most well-known. By its terms, subsection 163.2(4) does not specifically create an offence. In Guindon, the taxpayer argued that the penalty was so high that it was a “true penal consequence”, resulting in the creation of an additional offence under the Income Tax Act.

Read narrowly, the decision turns on Ms. Guindon’s failure to notify the Attorneys General of Canada and the provinces that the appeal involved a constitutional question. The Court seized on this failure and, in light of that, held that the Tax Court (and itself) lacked jurisdiction to grant a remedy that involving the Charter.

The Federal Court of Appeal went on, however, to make several interesting observations:

  • Although not forming the basis for its decision, the Federal Court of Appeal made it very clear that, even if proper notice had been given, it did not view section 163.2 as creating an offence;
  • The scope of the term “culpable conduct”, for the purposes of section 163.2, was left open for future debate, since the taxpayer’s actions in this case met that test under any interpretation proposed by counsel;
  • The penalty under section 163.2, being in the nature of a penalty, qualifies for consideration under the taxpayer relief provision of section 220(3.1) of the Income Tax Act. This notwithstanding that the CRA decides to impose the penalty, and is then charged with considering an application for relief from that penalty! The Court observed that the Minister’s discretion on an application for relief must be reasonable based on the purposes of the Income Tax Act, the fairness purposes that lie behind subsection 220(3.1) of the Income Tax Act, and a rational assessment of all the relevant circumstances of the case. The discretion to cancel all or part of a penalty must be genuinely exercised and must not be fettered or dictated by prior policy statements;
  • The Court suggested (with hesitation) that section 12 of the Charter might be applied in future exceptional cases involving section 163.2. Section 12 gives persons the right not to be subjected to cruel and unusual punishment.